October 05, 2016

The Performance Reporting Mess

Earlier this week, an investor reached out to me with a rather unusual question.  He was considering investing in a certain scheme, managed by one of the biggest fund houses.  While doing his research, he came across something that baffled him.  According to the fact sheet of the fund house, this scheme had been launched in 2003.  Yet according to Value Research, Morningstar, and every other fund analysis website that he checked, this scheme had been launched in 2009.  At first, he thought that there may have been a minor miscommunication between the fund house and those websites.  But when he looked closely, none of the websites were giving performance numbers for the period prior to 2009.  On the other hand, in the fact sheet, the return since 2003 was clearly mentioned.  His question was this: how could so many websites be wrong?

I found it interesting that he did not consider the possibility that the fund house may have mis-stated the facts.  I have previously reported instances of fund houses mis-stating scheme inception dates and fudging performance numbers (see here and here).  In this case, too, if I had to point the finger of blame, it would be at the fund house.  However, in this instance, there were a lot more shades of grey than either of those two instances.

As the official fact sheet suggested, the scheme in question had indeed been launched in 2003, with a single plan.  Then, in 2009, the fund house introduced a second plan.  The new plan was named ‘Institutional’ while the existing plan was renamed as ‘Retail’.  But after SEBI issued its ‘single plan’ directive in 2012, the fund house could retain only one plan, and had to discontinue the other.  For reasons best known to the fund house, it chose to retain the Institutional plan (launched in 2009) and discontinue the Retail plan (launched in 2003).  Thus, to an investor who wishes to buy units of this scheme today, he/ she can do so only under the Institutional plan.  The NAVs for the Retail plan will continue to be declared so long as investors remain in that plan.

Yet when you look at the official fact sheet, there is no performance report for the Institutional Plan at all.  In the fact sheet, the fund house only shows returns based on the growth in NAVs of the Retail plan, which is no longer available for subscription.  This throws up a few questions: Is it fair on the part of the fund house to only show returns on a plan that you can no longer buy into?  What will the fund house do once all investors have exited the Retail plan and there is no NAV declared?  How fair is it to claim its inception year as 2003?  And if the idea is to boast of the scheme’s long-term performance track record, then why on earth did this fund house discontinue the Retail plan?

Personally, I don’t think the fund house had an ulterior motive in discontinuing the Retail plan.  But it most certainly was a dumb decision.  And the manner in which the performance is now being presented in the fact sheet is deceptive. 

But here’s what is even more surprising: this fund house is not alone.  In the wake of SEBI’s ‘single plan’ directive, many fund houses made the choice to discontinue plans with longer performance track records than the plans that they chose to retain.  It wasn’t as if they did it for all schemes, but it did happen for many schemes.  In nearly all these cases, fund houses continue to claim the inception date to be the one on which the scheme was originally launched.  In some cases, there is no performance to show for that tenure whereas in other cases, the performance is shown for plans that you can no longer buy into.  In a nutshell: it’s a mess.

So what does this mean for investors?

Simply put, it means that you cannot trust the fund house fact sheets for performance reporting.  Even if a fund house has just one scheme in which such a discrepancy exists, there is no easy way for you to know which one it is.  For all you know, it may be the scheme whose performance you want to check.  If you still feel you want to give those fact sheets a try, be prepared to read between the lines, closely examine the footnotes, and refer to other documents.  Frankly, I think it would be a waste of your time.  To understand how widespread the issue is, consider this: I did a quick scan through the fact sheets of the ten largest fund houses (by AUM) and could find only one fund house whose fact sheet inspired confidence: Franklin Templeton.  With the fact sheet of every other large fund house, I couldn’t be sure that I had not missed something.

So, as I told the investor, if you want to be absolutely sure of performance numbers, you are much, much better off going with the fund analysis websites or crunching the numbers on your own.  Just don’t rely on the official fact sheets.

If you would like to see specific examples of how, in the wake of SEBI’s ‘single plan’ directive, some fund houses have presented a distorted and incomplete picture of scheme returns, click here.

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